The Hindu Business Line : Banks prefer G-Secs, parking with RBI to corporate lending

Chennai, Nov. 21 After all the liquidity enhancement measures that have been announced over the past month, you would have thought money would be pouring out of every tap and corporates would be rolling in the moolah!

The evidence, going by the RBI data up to November 7, doesn’t point to anything of that sort.

Banks have been quite lukewarm – lending just about Rs 27,000 crore during the last month. More pertinently, banks lent more to the Government! During the same period, banks have invested about Rs 90,000 crore in Government securities.

The investment deposit ratio for the banking system is currently at 30.48 per cent compared to 28.27 per cent a month ago. And during this period the RBI has, in effect, reduced the statutory liquidity ratio to 24 per cent.

So why did banks not use the leeway and reduce their holdings? The simple explanation for this behaviour is that banks were betting on further cuts in key policy rates and hoped to build up their treasury portfolio before that – so as to rake in some gains when rates were actually cut. And that was preferable when compared to lending to corporates, ministerial exhortations notwithstanding.

Besides, the liquidity crunch, if any, did not seem to be too visible going by the data of the reverse repo auctions of the RBI.

Banks get 6 per cent for such funds, an avenue they use to park temporary surpluses. For the last five days, banks have parked significant amounts in this window. Even a month ago, banks were borrowing heavily from the RBI on a daily basis.

So has the tide turned? Mr N.S. Venkatesh, Managing Director, IDBI Gilts, said that there was ‘sufficient liquidity but not excess liquidity’. He felt that the banks parking money in reverse repo was just a consequence of their having covered their statutory requirements during the first week of the reporting fortnight itself.

If they have done a bit of over-covering their positions last week, it was possible that they now prefer to deploy a little bit of the surplus with the RBI, he said. He was categorical that there was no liquidity glut in the market. The next week will tell.

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